The following is a recent news release from the National Association of Realtors. I thought it was an interesting view of the markets maybe putting some other factors into perspective.
Housing continues to be a solid investment, largely unaffected by the volatile movements
of the stock market, according to the National Association of Realtors.
The sharp changes in the financial markets over the last year underscore the
stability of residential real estate as a safe choice for consumers. “Homeownership
should be approached as a long-term investment, providing both equity accumulation and
tax benefits over time.
The National Association of Realtors reports the median existing-home price
increased a little over 4 percent last year, while Freddie Mac said home values increased
7 percent in 2000. In the same time frame, stock indexes finished in negative territory.
However, NAR pointed out that the true return on a home investment should not be based
simply on home appreciation, but also the amount leveraged. Homebuyers typically use
their own money to cover only 5 to 20 percent of the purchase price of a home, yet the
home appreciation they realize is based on the total value. “In other words,
homeownership is a leveraged buy-in”.
In addition, home buyers receive tax benefits for their investments, in the form of
deductions allowed for mortgage interest and property taxes. “This leveraging of borrowed
funds gives housing a return far in excess of the market’s appreciation”.
The 1998 “State of the Nation’s Housing” report from Harvard University’s Joint
Center for Housing Studies shows a dramatic increase in the rate of return on housing the
longer it is held. For instance, the housing survey shows that the typical homeowner who
experiences an annual home appreciation rate of 5 percent and who made a down
payment of 10 percent will generally receive a 94 percent return after owning the home
only three years.
After owning five years, the rate of return increases to 225 percent; after 10 years,
the rate of return jumps to 623 percent. For those making a 20 percent down payment
and experiencing the same amount of home appreciation, the rate of return is lower, but
still very respectable: after owning three years, the average rate of return is 46 percent;
after the five years, 110 percent; and after 10 years, 305 percent.
In comparing changes in stock prices to changes in housing prices, NAR noted that
while the stock market has experienced wide swings in value over the past 20 years,
home values overall have continued to rise steadily. Between 1976 and 1997, before the
more recent period of wild stock market variations, the Standard & Poor’s 500 Composite
Stock Price Index (S&P 500), a widely accepted measure of the performance of the U.S.
stock market, recorded an annual average growth rate of 11.7 percent. At the same time,
the resale value of homes rose at an annual average rate of 5.7 percent. However,
during four of those years, the S&P 500 posted a decrease in overall stock prices; while
housing prices in general increased consistently. In fact, during that time period, the
variance in stock returns was more than 13 times that of the variance in home
appreciation at the national level.
“Housing is not a quick-in, quick-out investment. However, when purchased for the
long term, housing is one of the safest investments a consumer can make,” NAR said. “In
addition to the savings accumulated through a buildup of equity and the tax advantages, a
home provides shelter. Absolutely no other investment provides this benefit.
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